Abstract |
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For two independent principles of intergenerational equity, the implied discount rate equals the growth
rate of real per-capita income, say 2%, thus falling right into the range suggested by the U.S. Office of
Management and Budget. To prove this, we develop a simple tool to evaluate small policy changes
affecting several generations, by reducing the dynamic problem to a static one. A necessary condition is
time-invariance, which is satisfied by any common solution concept in an overlapping generations model
with exogenous growth. This tool is applied to derive the discount rate for cost-benefit analysis under two
different utilitarian welfare functions: classical and relative. It is only with relative utilitarianism that the
discount rate is well-defined for a heterogeneous society, is corroborated by an independent principle
equating values of human lives, and equals the growth rate of real per-capita income. |